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SMEs: Pension planning for succession arrangements

As the owner of an SME, you should think about your succession well in advance. The appropriate strategy will depend on the succession solution, i.e. a transfer within the family or a sale. It is therefore wise to think early on about your succession and pension.

Business owners should make plans for the handover of their company early on, to allow enough time to put money aside for their pension if need be.

Succession arrangements are an emotive subject for business owners. In the ideal scenario, succession arrangements can be made within their own family circle. This raises a number of questions: How will the younger family member finance the company? How will children who don't work for the business be compensated? And how will the owner finance his or her well-earned retirement? It’s important for owners to deal with these questions early on.

Invest, invest, invest

Usually, in the early days, business owners invest all of their money in the company – initially in order to actually finance the business, but later on for tax reasons. The business in many ways becomes their pension fund. Because of this, however, it is advisable to start thinking about a pension at some point, rather than investing solely in the company.

Long-term view and potential change of strategy

From age 50 at the latest, a business owner should start considering the future of his SME: Would he rather sell the company or pass it on to a family member?

Sale of the company

If the owner wants to sell his company, he can continue investing a large portion of his money directly in it. This will work in his favour when he sells the SME.

Transfer within the family

If the owner would like to pass the company on to his son, for instance, he should plan well ahead. The earlier he decides on a pension solution, the more money he will amass for this later stage in his life. This might mean that the son doesn't have to pay his father the actual value of the business, or indeed might not pay anything, as the father is covered by his pension fund. Instead, siblings who are not involved in the company could be compensated after, say, 10 years, ensuring a satisfactory outcome for all the family members concerned.

Successor at the helm

The son should consider the following points when taking over the company and make informed decisions:

Dealing with key people: Employees contribute to the success of a business. Often, they feel a sense of loyalty to a particular boss. As the future boss, it is important to consider how you will meet these employees on their own ground, interact with them and take their needs into consideration.

Infrastructure: As a new business owner, you must decide which familiar, successful processes will be retained and where any new processes will be introduced.

Risk approach: Depending on the plans, a new risk approach may need to be devised and property insurance policies adjusted.